Supply contract and erection works held distinct; supply not a composite works contract, TDS under s.194C not applicable

ITAT KOLKATA held that two separate contracts-one for supply of plant, machinery and materials and another for erection/setting up (works contract)-were distinct, and dependency between them did not convert them into a composite works contract attracting TDS under s.194C for the supply component. The assessee had deducted TDS on the works contract payments; the finding of assessee in default under ss.201(1)/(1A) was set aside. Appeal allowed; assessee not an assessee in default.

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ISSUES PRESENTED AND CONSIDERED

1. Whether the assessee is an "assessee in default" under section 201(1)/(1A) of the Income-tax Act for failure to deduct tax at source under section 194C in respect of amounts paid for supply of goods under a contract related to erection/works for a power plant.

2. Whether separate contracts for supply of goods and for erection/works, though interdependent and containing cross-breach clauses, should be treated as a composite works contract attracting section 194C for the value of materials supplied.

ISSUE-WISE DETAILED ANALYSIS

Issue 1: Assessee in default under section 201(1)/(1A) for non-deduction under section 194C

Legal framework:

Section 194C requires deduction of tax at source on payments made to a contractor for carrying out any work (including supply of labour for carrying out any work). Section 201(1)/(1A) treats a person who fails to deduct/collect tax as an assessee in default and liable for tax and interest consequences.

Precedent Treatment:

No authoritative precedent was relied upon or applied by the Tribunal in the impugned order; the decision is founded on statutory interpretation and contractual facts.

Interpretation and reasoning:

The Tribunal examined the contractual architecture: two separate contracts existed - one for supply of plant, machinery and equipment (goods) with separately agreed prices, and another for erection/commissioning (works) with separately agreed consideration. Although the contracts were interdependent and contained a clause deeming breach of one to be breach of both, the Tribunal held that interdependence or a cross-breach clause does not convert two distinct agreements into a single works contract for the purposes of TDS under section 194C. The decisive factor is the character of the payment: payments that are truly for goods/supplies, quantified and invoiced as such, do not fall within the scope of a works contract liable to TDS under section 194C. The Tribunal noted that the assessee had deducted and deposited TDS on the consideration attributable to the erection/works portion; it had not deducted TDS on amounts paid purely towards supply of material under a separate contract. The Tribunal reasoned that the statutory scope of section 194C is limited to consideration for carrying out a works contract and does not extend to the cost of goods/materials separately contracted for and paid as such.

Ratio vs. Obiter:

Ratio: Where two separate contracts exist - one for supply of goods with separately agreed prices and another for execution/erection (works) - payments made under the supply contract are not subject to deduction under section 194C merely because the contracts are interdependent or contain cross-breach clauses. This interpretation informs the holding on liability under section 201(1)/(1A).

Conclusions:

The Tribunal concluded that the assessee was not an assessee in default under section 201(1)/(1A) for non-deduction under section 194C in respect of amounts paid under the separate supply contract, and set aside the demands raised by the lower authorities.

Issue 2: Characterisation of interdependent contracts - whether treated as composite works contract

Legal framework:

The legal question is one of contract characterisation for tax withholding purposes: whether an arrangement constitutes a works contract (taxable under section 194C) or separate supply and works contracts (with TDS only on the works component).

Precedent Treatment:

No earlier decisions were invoked to alter or displace established tests; the Tribunal applied principle-based analysis of the substance of agreements over form.

Interpretation and reasoning:

The Tribunal applied a substance-over-form test: it assessed whether payments were for goods or for work and whether the contractual terms merged the two into a single composite works contract. The presence of dependency (i.e., erection cannot proceed without supply) and a clause treating breach of one contract as breach of both were held insufficient, by themselves, to convert two distinct contracts into a single works contract. The Tribunal emphasised that interdependence is a common commercial feature and does not change the legal nature of separately agreed supplies. The characterisation turns on whether consideration paid is for carrying out work or for supply of goods. Since the supply contract fixed separate prices for materials and the supply payments were not part of the works consideration, section 194C did not apply to those amounts.

Ratio vs. Obiter:

Ratio: Dependency between contracts and contractual clauses deeming mutual breach do not automatically convert independently priced supply contracts into components of a composite works contract for TDS purposes; separate pricing and contractual separation sustain the non-application of section 194C to supply payments.

Conclusions:

The Tribunal concluded that the contracts remained legally separable notwithstanding practical interdependence; therefore, the supply portion was not subject to section 194C withholding, and the assessee's position of having deducted TDS only on the works component was correct.

Interrelation and Practical Outcome

The Tribunal treated the two issues as interrelated: the factual finding of two separate contracts with distinct pricing led to the legal conclusion that section 194C did not apply to the supply payments and thus there was no default under section 201(1)/(1A). The lower authorities' characterisation of the arrangement as a composite works contract was reversed on the ground that contractual dependence and cross-breach clauses alone cannot override separate contractual identities.

Disposition

On the foregoing reasoning, the Tribunal allowed the appeals and set aside the demands under section 201(1)/(1A) insofar as they related to amounts paid under the separate supply contract, holding that no TDS under section 194C was chargeable on those payments.

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